Axel Merk: Fed Is 'Breaking the Link' Between Inflation and Monetary Policy

The Federal Reserve’s decision to roll out a third round of bond purchases from banks to jolt the economy reveals the U.S. central bank will do whatever it takes to fuel job demand, even if it means pumping inflation rates up, said Axel Merk, president and CIO of Merk Investments and a Moneynews contributor.

The Fed recently announced plans to stimulate the U.S. economy by buying $40 billion in mortgage-backed securities from banks every month on an open-ended basis until the economy improves and more Americans find jobs.

The move, known as quantitative easing, functions by pumping liquidity into the financial system in a way that pushes down interest rates across the economy to encourage investing and hiring.

The Fed bases such decisions on a dual mandate to control prices and to keep employment rates at optimal levels, and considering the Fed has juiced the economy with quantitative easing twice in the last four years before this latest round, the inflation mandate has clearly taken a back seat to jobs and growth.

“He is tying monetary policy to the unemployment rate, which means that he is going to do anything he can to push up growth, which means he is going to disregard inflation.”

Quantitative easing weakens the dollar and sends stock prices and commodities rising as side effects.

A weaker dollar can help steer the economy away from deflationary decline and boost exports, though it also can pump up inflation rates.

Bernanke has said that monetary policy is not a panacea and has added that Congress must make fiscal reforms to get the economy going.

At the end of this year, the Bush-era tax cuts and other tax breaks are scheduled to expire at the same time preprogrammed cuts to government spending kick in, a combination known as a fiscal cliff that could send the country sliding into recession next year if left unchecked by Congress.

Businesses have put off expanding and hiring due to uncertainty surround the fiscal cliff, especially when it comes to not knowing how much taxes they will be paying.

Many argue a lack of political will among lawmakers to address the fiscal cliff in an election year is forcing the Fed to stimulate the economy with monetary policy.

“It would be the right thing to tell Congress to get their act together,” Merk said.

Bernanke has told Congress to deal with the fiscal cliff, though according to Merk, Bernanke hasn’t been emphatic enough.

“What he should do is say ‘look at the Soviet Union, look at Cuba, look at North Korea: would monetary policy have fixed the mess that they are in?’ No,” Merk noted.

“It does require Congress to get rid of the uncertainty on the tax side, on the regulatory side. They need to be the ones getting their act together,” he added.

Not all Fed officials agreed with the recent decision to stimulate the economy anew, including Dallas Fed President Richard Fisher, a noted inflation hawk.

Monetary policy cannot battle ongoing uncertainty, he explained.

“The truth, however, is that nobody on the committee, nor on our staffs at the Board of Governors and the 12 Banks, really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course,” Fisher told the Harvard Club recently, according to prepared remarks of his speech.

“And nobody — in fact, no central bank anywhere on the planet — has the experience of successfully navigating a return home from the place in which we now find ourselves. No central bank — not, at least, the Federal Reserve — has ever been on this cruise before.”

The Federal Reserve’s decision to roll out a third round of bond purchases from banks to jolt the economy reveals the U.S. central bank will do whatever it takes to fuel job demand, even if it means pumping inflation rates up, said Axel Merk, president and CIO of Merk Investments.